New Amtrak Boondoggle May Outdo All Others

Legislation now before Congress proposes
to dedicate as much as $16 billion of future budget surpluses to
prop up Amtrak, America's federally chartered and subsidized
passenger rail service. Members of Congress should view this new
proposal with skepticism given Amtrak's record-breaking losses,
stagnant ridership, and persistent failure to implement high-speed
rail service, promised for 1997 and now delayed for a third
straight year.

Instead, Congress should exercise its
oversight responsibility to investigate the system's future
viability. It should also weigh the value received from the $23
billion in direct federal
subsidies--including $3.6 billion over just the past three years1--that U.S.
taxpayers already have poured into the system merely to keep it
afloat.

The
High Speed Rail Investment Act (S.1900, H.R. 3700), introduced by
Senator Frank R. Lautenberg (D-NJ) and Representative Amo Houghton,
Jr. (R-NY), would allow Amtrak to borrow as much as $10 billion in
interest-free loans over the next 10 years. Although Amtrak would
pay no interest, lenders would still earn the equivalent of
interest on the loans through a federal tax credit equal to the
interest paid on long-term corporate bonds.2 Currently, this
rate is about 8 percent per annum. In effect, the U.S. Treasury
would pay the interest to the bondholders on behalf of Amtrak.

These implicit interest payments by the
federal government could add up to as much as $16 billion over the
life of the bonds. For example, at an 8 percent interest rate, an
individual investor holding a $1,000 Amtrak bond would be entitled
to an $80 tax credit each year the bond is held. This means that if
the investor owed $10,000 in federal income taxes in a given year,
the $1,000 Amtrak bond would reduce his or her tax obligation to
$9,920. The bill authorizes the issuance of $10 billion worth of
these bonds at maturities of up to 20 years. The loss of tax
revenues to the U.S. Treasury would total $16 billion if interest
rates remained unchanged at 8 percent.

Renewed congressional efforts to bail out
Amtrak are a striking turnaround from commitments made just a few
years ago. In 1994, Amtrak promised to improve its operations and
performance so that it could eliminate the need for federal
subsidies by 2002.3 In 1997, Congress
confirmed that commitment when it passed the Amtrak Reform and
Accountability Act (PL 105-134), which among other provisions
established the Amtrak Reform Council, whose responsibility was to
notify Congress and the President in the event Amtrak failed to
meet its financial goals.

Currently, however, Amtrak is not meeting
its goals; instead, its operating losses are escalating from year
to year. Doubts about Amtrak's ability to meet its financial
objectives are shared by the Department of Transportation's
Inspector General, who observed in a recent report to Congress that
meeting the goal of self-sufficiency by 2003 will be "difficult."4

Not
only is Amtrak failing to meet its promise and statutory
requirement to break even financially by 2002, but its financial
situation has worsened. Amtrak's annual operating loss rose from
$833 million in 1994 to a record $930 million in 1998. Its loss for
1999 was $916 million,5 and losses for the
first half of fiscal year (FY) 2000 are reported to be higher than
those during the same period in 1999.6

Furthermore, these losses have ballooned
despite a booming economy that has sent Americans traveling in
record numbers and caused business profits to soar. This suggests
that Amtrak's management and strategic plan are not up to the task
of meeting the FY 2002 financial objectives.

LOSSES AMID RISING PROSPERITY

The
rising prosperity of the 1990s has led to unprecedented mobility
and travel opportunities for all Americans, and this in turn has
benefited almost all segments of the transportation industry.
Between 1990 and 1999, the number of domestic airline passengers
rose by 37 percent, from 423 million at the beginning of the decade
to 582 million last year.7 Automobile use as
measured by passenger-miles increased by 25 percent from 1990 to
1998.8

Even
intercity bus service, Amtrak's closest competitor, saw its
passenger volume rise by 7 percent between 1990 and 1998.9 Indeed, intercity
bus service currently carries 17 times more passengers than Amtrak,
and Amtrak's share of the intercity passenger market amounts to
only six-tenths of 1 percent nationwide when measured in
passenger-miles.10

In
contrast to its competitors' success, Amtrak was one of the rare
American businesses that bucked the trend toward increased
customers and soaring profits in the past decade. According to the
railroad's most recent annual report, Amtrak's annual passenger
level fell from 22.2 million passengers in 1990 to 21.5 million
last year,11 and its operating
loss widened from $704 million to $916 million over the same
interval.

ACELA TO THE RESCUE?

As
it has done so many times before, the railroad's management has
responded to failure by promising to do better next year--if only
Congress will give Amtrak more money now. Amtrak's 1994 commitment
to break even by 2002 was the most recent of these promises.

Recognizing that a history of broken
promises is becoming tiresome to some in Congress, Amtrak has
resorted to a clever new public relations tactic. It now proposes
to implement a profitable, high-speed rail service called the
Acela. Amtrak maintains that the Acela will be so profitable that
it will make Amtrak financially self-sufficient and independent of
future federal subsidies. The $10 billion loan proposal, under this
scenario, would be America's down payment on this promise.

The
promise, however, is not likely to be fulfilled. Amtrak has never
made a real profit on any of its existing lines, and there is no
reason to expect that this 30-year record of disappointment is
about to end. For example, one of Amtrak's particularly costly
lines is the Cardinal route, running between Chicago and
Washington, D.C., via West Virginia, which incurs $3.29 of cost for
every dollar of earned revenue. Overall, according to the U.S.
General Accounting Office (GAO), Amtrak incurs costs of $1.86 for
each dollar of revenue it receives.12

Even
Amtrak's contention that it makes a small profit on its Metroliner
service in the Northeast Corridor is true only under Amtrak's
less-than-complete accounting standards. To declare the Metroliner
profitable, Amtrak must neglect the capital costs associated with
road bed, rolling stock, engines, buildings, and signal
systems.

While the perennial optimist could argue
that Amtrak might improve its operations, Amtrak's high-speed rail
performance to date suggests that the Acela program will not be the
catalyst. Service was scheduled to begin in 1997, but a series of
design, mechanical, and testing problems have delayed the opening,
and a new date has not been set for Acela's debut.13

Assuming that the high-speed line
ultimately does open, its anticipated profitability depends upon
substantially increased ridership. The increased ridership figures,
however, may be overly optimistic. Taking the Acela rather than the
Metroliner on the route where it would work best--between New York
and Washington--would save a traveler only 15 minutes, reducing the
trip from three hours to two hours and 45 minutes. While this
represents some improvement, the change is not likely to convince
passengers to abandon cars or planes.

On
the Boston to New York run, Amtrak projects the Acela will reduce
train times from four hours and 30 minutes to three hours.14 This is a
significant improvement, but it is still substantially longer than
flying. The same trip on a scheduled airline is currently only one
hour and 20 minutes.

THE POTENTIAL FOR BLACKMAIL

Perhaps the most troublesome aspect of the
proposed $10 billion federally subsidized loan is not its projected
taxpayer cost of $16 billion. While worrisome, the cost is eclipsed
by the potential for even greater taxpayer costs as a result of the
opportunities for fiscal blackmail that a debt of that magnitude
would create. If the federal government decided to end its funding
of Amtrak at some point, it might feel bound to assume the costs of
the loan. If Amtrak were to add the cost of the loan to the cost of
its liquidation, it would have leverage with which to argue against
such a liquidation.

In
past efforts to prolong the life of a failing Amtrak, supporters
argued that the government's liquidation cost if it were to allow
Amtrak to go bankrupt would vastly exceed the subsidies necessary
to achieve Amtrak's financial independence. In 1997, for example,
Amtrak claimed that the costs associated with its liquidation could
be as high as $10 billion to $14 billion. Congress asked the
General Accounting Office to confirm this,15 but the GAO was
unable to estimate Amtrak's likely liquidation costs with
confidence.

However, if Congress passes the High Speed
Rail Investment Act, it might feel obliged to incur the cost of the
$10 billion in federally subsidized bonds; this would be in
addition to the other costs that it could incur if it chose to
liquidate Amtrak. Although the legislation would not grant the
government's full faith and credit to the special Amtrak tax credit
bonds, the government would have a moral obligation to reimburse
those who invest in these bonds. Because the government created,
subsidizes, and directs Amtrak, it would be expected to shoulder
the responsibility of making good on the loan if Amtrak were to
fail.

And
Amtrak would make the most of this obligation. If it fails to break
even in 2002 as it has promised, it no doubt will use the
obligation as leverage to seek ever more costly bailouts.

SUBSIDIZING THE LAST CHOICE IN
TRAVEL

Notwithstanding Congress's long-standing
obsession with socialized rail passenger service and its $23
billion investment in Amtrak, intercity travelers continue to shun
Amtrak in favor of alternate modes of transport. For this reason,
the High Speed Rail Act represents an exceptionally costly bailout
of an enterprise that has failed to provide cost-effective service
during its 30 years of operation.

When
Congress passed the Amtrak Reform and Accountability Act in 1997,
it gave the Amtrak Reform Council the responsibility to assess
Amtrak's progress toward financial independence by 2002. If that
goal is not met, the Council will have to determine whether Amtrak
should be restructured or liquidated. Congress should make no
additional financial commitments to Amtrak until the council
submits its report and recommendations and Congress reviews
them.

In
the meantime, Congress should study the growing number of
privatization reforms that have been applied successfully to
government-operated passenger rail service in other countries,
including Great Britain and Japan.16 Given Amtrak's
long history of failed schemes and operating losses, such
innovations--not $10 billion for an unproven high-speed rail
program--are the only way Amtrak will improve its own
operations.

Ronald D. Utt, Ph.D. is Senior
Research Fellow in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.

14.National Railroad
Passenger Corporation, "Acela Questions & Answers," at www.acela.com/questions/index.htm,
August 2000. In reality, the diminished time for the Boston-New
York run is closer to an hour, not the 90 minutes claimed. Amtrak
has already reduced the time on the run by 30 minutes by
eliminating the engine change in New Haven, Connecticut, now that
the line from New Haven to Boston has been electrified.